CHAPTER FIVE

GENERAL FUND & SPECIAL REVENUE FUNDS

5.1 INTRODUCTION
5.1.1 General Fund
As it can be recalled from chapter two, the general fund is used for general governmental activities such
as police, administration and the like. To distinguish the general fund adversely, it can be said that the
general fund should account for all financial resources for which a separate fund is not required. All
governmental entities have a general fund (GF). Although it may be called the operating fund, the current
fund or something similar, the general fund will exist as long as the entity exists. A governmental entity
will have only one general fund. The general fund of a state or local government unit is the entity that
accounts for all the assets & resources used for financing the general administration of the unit & the
traditional services provided to the people.
5.1.2 Special Revenue Fund
Special revenue fund (SRF) in contrast to GF is used to account for resources, which are collected for a
specified purpose. Whenever a tax or other revenue source is authorized by legislative body to be used
for specific purpose, only a governmental unit availing itself of that source may create a Special Revenue
Fund in order to be able to demonstrate that all revenue from the source was used for the specified
purpose, only separate special revenue funds are established by governmental units, as mandated by
legislative enactments to account for the receipts and expenditures associated with specialized revenue
sources that are earmarked by law or regulation to finance specified governmental operations. Fees for
rubbish collection, state taxes on diesel fuel that is required to be used only for road maintenance, tax on
hotel rooms to be used to improve tourist facilities, traffic violation fines are examples of governmental
units revenues that may be accounted for in a separate special revenue fund.
- Comparison:
The general fund should account for all financing sources for which a separate fund is not required.
Special revenue funds are necessary when they are required by law or contract. A governmental entity
will have several special revenue funds at any time & these funds are opened & closed according to need.
The general funds and the special revenue funds have different purposes, but they are both revenue funds,
and the accounting and reporting procedure is the same for both. They are similar in that all or almost all
of their resources are expended each year. They are then filled up (replenished) again for the next year.
5.2 ACCOUNTING CHARACTERISTICS
Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the same as
for salaries or utilities. Such fixed assets are not accounted for by these funds; because, they are not
normally converted into cash. Similarly the same categories of funds account for only those liabilities
incurred for normal operations that will be liquidated by use of fund assets.
The arithmetic difference between the amount of financial resources and the amount of liabilities
recorded in the fund is called the fund equity.
equity. Residents of the governmental unit have no legal claim on
any excess of liquid assets over current liabilities. Therefore the fund equity is not analogous to the
capital accounts of an investor owned entity. Accounts in the fund equity category of general funds &
special revenue funds consist of reserve accounts established to disclose that portion of the equity not
available for appropriations. The portion of equity available for appropriation is disclosed in an account
called Fund Balance.
Balance. General funds & special revenue funds account for financial activities during a
fiscal year in accounts classified as revenues, other financing sources, expenditures & other financing
uses.
1. Revenue It is the increase in the fund financial resources other than from inter fund
transfers & debt issue proceeds.
2. Other It is the increase in the fund financial resources as a result of operating
Financing transfers into a fund and debt issue proceeds received by a fund.
Sources
3. Expenditure It is a decrease in fund financial resources other than through inter fund
 transfers (like operating transfers out) of a fund are classified as other
financing uses. It is a term which replaces both the terms costs and expenses
used in accounting for profit seeking entities.
It is a decrease in the fund financial resources as a result of operating
transfers out of a fund. An example of the use of transfer accounts occurs in
those jurisdictions where a portion of the taxes recognized as revenue by the
4. Other general fund of a unit is transferred to a debt service fund which will record
Financing expenditures for payment of interest and principal of general obligation debt.
Uses The general fund would record the amounts transferred as operating transfers
out: the debt service fund would record the amount received as operating
transfers in. Thus the use of transfer accounts achieves the desired objective
that revenues are recognized in the fund which levied the taxes and
expenditures be recognized in the funds which expends the revenue. In few
jurisdictions taxes must be collected in the year before the year in which they
are available for expenditure. In such jurisdictions tax collection should be
credited, deferred revenue should be debited & revenue should be credited.
Under accrual basis, expenditure is recognized when a liability to be met from fund asset is incurred. It is
important to note that an amount of a liability incurred whether the liability is for salaries (an expense)
for supplies (a current asset), or for a long lived capital assets such as land building or equipment.

5.3 BUDGET & BUDGETARY ACCOUNTS

The fact that budgets are legally binding upon administrators has led to the incorporation of budgetary
accounts in the general fund and in the special revenue funds and in all other funds required by law to
adopt a budget. Budgeting is the process of allocating scarce resources to unlimited demands. Budgeting
has a great role in governmental accounting than in profit making business.

Budgeting is a key element of legislative control over governmental units. The two classifications of
budget for governmental units are the same as those for business enterprises. These are annual budgets
and long term or capital budgets. Annual budgets include the estimated revenues & appropriations for
expenditures for a specific fiscal year of the governmental unit. Annual budgets are appropriate for the
general fund & special revenue funds. They sometimes are used for other governmental funds.
Expendable trust funds also may have an annual budget, depending upon the terms, the terms of the trust
indenture. Capital budgets, which are used to control the expenditures for construction projects or other
plant asset acquisitions, may be appropriate for capital projects funds. The annual or capital budgets often
are recoded in the accounts of all these funds, to aid in act for compliance with legislative authorities.

The operations of the two proprietary funds are similar to those of business enterprises. Consequently,
annual budgets are used by these funds as a managerial planning & control device rather than as a
legislative control tool. Thus annual budgets of enterprise funds & internal service funds generally are
not recorded in ledger accounts by these funds.

In order to facilitate preparation of budgets and preparation of the combined statement of revenues,
expenditures and changes in fund Balance- Budget and Actual required for GAAP conformity,
accounting systems of funds for which budgets are required by law should incorporate budgetary
accounts. Only three general ledger control accounts are needed to provide budgetary control. These are:
1. Estimated Revenues – resources expected to be received
2. Appropriations – is both an authorization to spend and limitation of spending. (estimated
expenditure ,which is expected to be incurred).
3. Encumbrances – Purchase orders (PO) in governmental entities have the function of keeping track
of coming expenditures so that the budget is not exceeded. This is done by actually recording the
PO in the ledger account as an Encumbrance.

All the three must be supported by subsidiary ledger accounts whatever detail is required by law or by
sound financial administration. Budgeted inter fund transfers and debt issue proceeds may be recorded in
Estimated Other Financing Sources and Estimated Other Financing Uses control accounts supported
by subsidiary accounts as needed.

5.3.1 Recording the Budget

At the beginning of the budget period, estimated revenue control account is debited for the total amount
of revenues expected to be recognized, as provided in the revenues budget and the limitation of spending
or authorized expenditures will be recorded with a credit in the appropriations control account. The
amount of revenue expected from each source specified in the revenues budget is recorded in a subsidiary
ledger account so that the total of subsidiary ledger detail agrees with the debit to the control account and
both agree with the adopted budget. The same way will also be used for the appropriation. The entry to
record the budget is simple. It is normally done on the first day of the fiscal year. Estimated revenue is
debited, Appropriations is credited, and fund balance is debited or credited for the difference.
Appropriation could be further subdivided by month or other periods; these subdivisions are called
Allotments.

Recording encumbrance helps the one managing the finances to know that money has been committed
to some purpose and is no longer available for expenditure. There is often a delay between placing the
purchase order and receiving the goods ordered. Therefore it is possible for the administrators to forget
about the purchase orders that have been placed and to think that the money is still available to be used.
This is especially true in a large entity where dozens of purchase orders are placed each week. To ensure
that outstanding purchase orders are not overlooked in the ongoing commitment of resources, purchase
orders are recorded in the Encumbrance account. An encumbrance differs from expenditure in that the
encumbrance is an estimate of liability to be incurred while expenditure is an actual liability which has
been incurred. The reason that encumbrance is only an estimate is that invoiced amounts sometimes
differ from purchase order amounts. For example a particular item may be out of stock, and either
backordered, or substituted by a similar item.
Encumbrance Illustration:
1. When a purchase order #01 for goods or services for ETB 150,000 is issued to a supplier by one of
those funds, a journal entry similar to the following is prepared for the fund.
Encumbrance 150,000
Fund Balance Reserved for Encumbrances 150,000
(To record encumbrances for purchase order #01 issued to X Company (supplier)
2. When the suppliers invoice for the ordered merchandise or services is received by the governmental
unit, it is recorded and the related encumbrance is reversed as seen below:
Expenditures 180,500
Vouchers payable 180,500
(To record an invoice received from X Company under purchase order #01)
Fund Balance reserved for Encumbrances 150,000
Encumbrances 150,000
(To reverse encumbrance for purchase order #001 issued to X Company)
Two journal entries are needed for encumbrances, one when the order is placed and another when the
goods are received. When the order is placed, encumbrance is debited and Reserve for Encumbrance (a
fund balance account) is credited. When the order is received, the entry is reversed. As indicated by the
example above the invoice amount may differ from the amount of the governmental units purchase order
because of such items as shipping charges, Sales Taxes, and price changes.
Regardless of which types of annual budgets are used by government unit, the final budget adopted by
the governmental unit’s legislative body will include estimated revenue other financing sources,
appropriations and other financing uses. If the estimated revenue and other financing sources of the
budget exceed appropriations and other financing uses (as required by law for many governmental units),
there will be budgetary surplus, if vice-versa, there will be budgetary deficit.
5.4 ACCOUNTING FOR GENERAL FUND AND SPECIAL REVENUE FUND
Illustration
Below is the Balance Sheet of town of X General fund on June 30, year 5 and the annual budgets adopted
for the year ended June 30, year 6.
Town of X General Fund
Balance Sheet June 30, year 5
Assets
Cash 1,600,000
Inventory of supplies 400,000
Total Assets 2,000,000
Liabilities and Fund Balance
Vouchers payable 800,000
Fund balance:
Reserved for inventory supplies 400,000
Unreserved and undesignated 800,000
Total liabilities and fund balance 2,000,000
Below is the approved budget by the town council for the fiscal year ended on June 30, year 6.
Estimated revenues:
General property taxes............................ 7,000,000
Licenses and permits.............................. 400,000
Charges for services…........................... 500,000
Fines and forfeit.…................................ 300,000
Miscellaneous revenues......................... 200,000 8,400,000
Estimated other financing sources (transfer from EF) 100,000
Appropriation:
General government............................... 4,700,000
Public safety........................................... 1,900,000
Health and welfare.................................. 1,100,000
Culture and recreation............................. 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000
* The journal entry to record the annual budget for the town of X General fund on July 1,
Year 5 was as follows:
Estimated revenues 8,400,000
Estimated other financing sources 100,000
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
An analysis of each of the ledger accounts in the forgoing journal entry follows:
1) Estimated Revenues and Estimated Other financing Sources ledger account may be considered
Pseudo Asset controlling accounts because they reflect resources expected to be received by the
General Fund during the fiscal year. These accounts are not actual assets because they do not fit the
accounting definition of an asset as a probable economic benefit obtained or controlled by a
particular entity as a result of past transactions or events . Thus the two accounts in substance are
 memorandum accounts, useful for control purposes only, that will be closed after the issuance of
financial statements for the General fund for the fiscal year ending June 30 year 6.
2) The estimated other financing source ledger accounts includes the budgeted amounts of such non
revenue items as proceeds from the disposal of plant assets and other operating transfers from other
funds.
3) The appropriations and estimated other financing uses ledger account may be considered pseudo
liability controlling accounts because they reflect the legislative body’s commitment to expend
general fund resources as authorized in the annual budget. These accounts are not genuine liabilities
because they do not fit the definition of a liability as a probable future sacrifice of economic benefits
arising from present obligation of a particular entity to transfer assets to provide services to other
entities in the future as a result of past transactions or events . The appropriations and other financing
uses are memorandum accounts, useful for control purposes only, that will be closed after issuance of
financial statements at the end of the year for the general fund.
4) The estimated other financing uses accounts include budgeted amount of operating transfers out to
other funds, which are not expenditures.
5) The budgetary fund balance ledger account, as its title implies is an account that balances the debit
and credit entries to accounts of a budget journal entry. Although similar to the owners’ equity
accounts of a business enterprise in this balancing figure, does not purport to show an ownership
interest in the general funds assets. At the end of the fiscal year, the budgetary fund balance account
is closed by a journal entry that reverses the original entry for the budget.

The journal entry to record the town of X general funds annual budget for the year ending June 30 year 6
is accompanied by detailed entries to subsidiary ledgers for Estimated Revenues, Estimated other
financing Sources, Appropriations and Estimated Other Financing Uses. T he budget of the town of X
general fund purposely was condensed; in practice the general fund estimated revenues
and appropriations would be detailed by source and function, respectively into one of the
following widely used subsidiary ledger categories:
Estimated Revenues Appropriations
- Taxes - General government
- Licenses and permits - Public safety
- Intergovernmental revenues - Public works
- Charges for Services - Health and Welfare
- Fines and Forfeits - Culture – recreation
- Miscellaneous - Conservation of natural resources
- Debt service
- Intergovernmental expenditures
- Miscellaneous
Such details will be discussed in the next topic; Classification and terminology of governmental funds
budget and accounts.

In summary, budgets of a governmental unit are often recorded in the accounts of the four governmental
funds. An expendable trust fund may also record a budget if required to do so by the trust indenture. The
recording of the budget initiates the accounting cycle of each for each of the funds listed above.
Recording the budget also facilitates the preparation of financial statements that compare budgeted and
actual amounts of revenues and expenditures.

Assume that in addition to the budget illustrated earlier, the town of X general fund had the following
summarized transaction and events for the fiscal year ended June 30, 19x6
1) Property taxes were billed in the amount of 7,200,000 of which 140,000 was of doubtful
collectability.
 Property tax receivable- current 7,200,000
Allowance for uncollectible current taxes 140,000
Revenue 7,060,000
(To accrue property taxes billed and to provide for estimated uncollectable portion)
Explanation-
Explanation- The modified accrual basis of accounting for a general fund permits the accrual of property
taxes, because they are billed to the property owners. The estimated uncollectable property taxes are
offset against the total assets billed in order to measure actual revenues from property taxes for the year.
2) A total of ETB 6,500,000 amount of property tax were collected and a total of 1,020,000 amounts of
cash from other revenue sources like licenses and permits, fines and forfeits, miscellaneous sources
were also collected.
Cash 7,520,000
Property taxes receivable-current 6,500,000
Revenue 1,020,000
(To record collection of property taxes and other revenues for the year)
Explanation-
Explanation- Under the modified accrual basis of accounting, revenues not susceptible to accrual is
recognized on the cash basis like self assessment basis tax revenue (E.g. Income tax, Sales Tax, Gross
receipts Tax) and miscellaneous revenues (E.g. Annual business licenses, construction and home
improvement permits, Fines and forfeits etc.)
3) Property tax in the amount of 130,000 was uncollectible.
Allowance for uncollectable current taxes 130,000
Property taxes receivable- current 130,000
(To write off receivables for property taxes that is uncollectable)
Explanation-
Explanation- The forgoing journal entry represents a shortcut approach. In an actual situation,
uncollectible property taxes first would be transferred together with estimated uncollectable amounts, to
the Taxes Receivable- Delinquent ledger account from the Taxes Receivable- Current account. account. Any
amounts collected on these delinquent taxes would include revenues for interests and penalties required
by law. Any uncollected delinquent taxes would be transferred, together with estimated uncollectible
amounts to the Tax-Liens Receivable ledger Account. Account. After the passage of an appropriate statutory
period, the governmental unit might satisfy its tax lien by selling the property on which the delinquent
taxes were levied.
4) Purchase orders for non recurring expenditures were issued to outside suppliers in the total amount of
3,600,000.
Encumbrances 3,600,000
Fund Balance reserved for Encumbrances 3,600,000
(To record purchase orders for non-recurring expenditures issued during the year)
Explanation-
Explanation- encumbrance journal entries are used to prevent the over expending of an appropriated
amount in the budget. This journal entry to the encumbrances ledger account is posted in detail to reduce
the unexpended balances of each applicable appropriation in the subsidiary ledger for appropriation. The
unexpended balance of each appropriation is thus reduced for the amount committed by the issuance of
purchase orders.

5) Expenditures for the year totaled 7,600,000 of which 900,000 applied to the acquisitions of supplies
and 3,500,000 applied to 3,550,000 of the purchase orders in the total amount of 3,600,000 issued
during the year. (Assume
(Assume consumption method).
method).
a) Expenditures 6,700,000
Inventory of supplies 900,000
Vouchers payable 7,600,000
(To record expenditures for the year)
Explanation-
Explanation- the expenditure ledger account is debited with all expenditures regardless of purpose
except for Additions to the Inventory of Supplies,
Supplies, Principal and Interest Payments on Debt, Additions to
the Governmental Unit’s Plant Asset, Payments for Goods or Services to be Received in the Future , - all
are debited to expenditure or other financing uses rather than to asset or liability ledger account.
(Expenditure for debt principal and interest and plant asset additions are also recorded on a memorandum
basis in the general long-term debt and general fixed assets account group respectively.
b) Fund Balance reserved for Encumbrance 3,550,000
Encumbrance 3,550,000
(To reverse encumbrances applicable to voucher expenditures)
Explanation- Recording actual expenditures of 3,500,000 (included in the 6,700,000 total in entry 5a
above) applicable to purchase orders totaling 3,550,000 makes this amount of the previously recorded
encumbrances no longer necessary. Accordingly 3,550,000 of encumbrance are reversed. Encumbrances
of 50,000 (3,600,000 - 3,550,000) remain outstanding.
6) Billings for services and supplies received from enterprise fund and internal service fund totaled
300,000 and 200,000 respectively.
Expenditures 500,000
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
(To record billings for services and supplies received from other funds)
Explanation-
Explanation- Billings from other funds of the governmental unit are not voucher for payment as are
billings from outside suppliers. Instead billings from other funds are recorded in a separate liability
ledger account. The related debit is to the expenditure accounts if the billings are for Quasi- external
transaction, such as providing services and supplies.
7) Cash payments on vouchers payable totaled 7,700,000. Cash payment to the Enterprise fund and the
internal service fund were 250,000 and 140,000 respectively.
Vouchers payable 7,700,000
Payable to Enterprise fund 250,000
Payable to Internal service fund 140,000
Cash 8,090,000
(To record payment of liabilities during the year)
8) The town of X general fund made an operating transfer of 110,000 to the debt service fund for the
matured principal and interests.
Other financing uses 110,000
Cash 110,000
(To record transfer to debt service fund for maturing principal and interest on General obligation serial
bond)
Explanation-
Explanation- The other financing uses ledger account is debited because the payment to the debt service
fund is an operating transfer rather than quasi- external transaction.
9) A payment of 400,000 in lieu of property taxes and a subsidy of 100,000 were received from the
Enterprise fund.
Cash 500,000
Revenue 400,000
Other Financing Sources 100,000
(To record payment in lieu of property taxes (400,000) and subsidy (100,000) received from Enterprise
fund)
Explanation-
Explanation- Amounts transferred to the general fund from other funds are recognized as revenues if
they are quasi-external transactions, such as payment in lieu of property taxes; otherwise they are
recognized as other financing sources if they are operating transfers, such as subsidies.
10) Supplies at a cost of 800,000 were used during the year.
Expenditures 800,000
Inventory of supplies 800,000
(To record cost of supplies used during the year)
 Unreserved and undesignated fund balance 100,000
Fund balance reserved for inventory of supplies 100,000
(To increase inventory of supplies reserve to 500,000 to agree with balance of inventory of supplies
ledger account at end of year i.e., (400,000 + 100,000))
Explanation-
Explanation- The preceding journal entry represents a restriction of the portion of the fund balance
account to or event it’s being appropriated improperly to finance a deficit annual budget for the general
fund for the year ending June 30, year 7. Only cash and other monetary assets of a general fund are
available for appropriation to finance authorized expenditures of the succeeding fiscal year.
11) All uncollected property taxes on June 30 year 6 were delinquent.
Taxes Receivable- Delinquent 570,000
Allowance for uncollectable Current Taxes 10,000
Property Taxes Receivable- Current 570,000
Allowance for Uncollectable Delinquent Taxes 10,000
(To transfer delinquent taxes and related estimated uncollectable amounts from the current
classification)
Explanation-
Explanation- The forgoing journal entry clears the Taxes Receivable- Current ledger account and the
related contra account for uncollectable amounts so that they will be available for accrual of property
taxes for the fiscal year ending June 30, year 7.
12) The town council designated 250,000 of the unreserved and the undesignated fund balance for the
replacement of equipment during the year ending June 30, year 7.
Unreserved and Undesignated Fund Balance 250,000
Fund Balance Designated for- Replacement of Equipment 250,000
(To designate a portion of the fund balance for the replacement of equipment during the year ending June
30, year 7)
Explanation-
Explanation- The fund balance designated for replacement of equipment ledger account is similar to a
retained earnings appropriation of a business enterprise. It indicates that the annual budget for the town of
X General fund for the year ending June 30, year 7 must include an appropriation of 250,000 for new
equipment and estimated revenue for the proceeds from the disposal of the replaced equipment. The
designated Fund balance of 250,000 will be closed to the unreserved and undesignated fund balance
Ledger account on July 1, year 6, when the annual budget for the year ending June 30 year 7 is recorded.
Trial balance at end of fiscal year for a General fund
After all the forgoing journal entries (including the budget entry) have been posted to the general ledger
of the town of X General Fund, the trial balance on June, 30 year 6 is as illustrated below.
Town of X General fund
Trial Balance
June 30, year 6
Account title Dr. Cr.
Cash 1,420,000
Taxes Receivable- Delinquent 570,000
Allowance for Uncollectable Delinquent Taxes 10,000
Inventory of Supplies 500,000
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service Fund 60,000
Fund Balance Reserved for Encumbrances 50,000
Fund Balance Reserved for Inventory of Supplies 500,000
Fund Balance Designated for Replacement of Equipment 250,000
Unreserved and undesignated fund balance 450,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
 Estimated Other Financing Sources 100,000
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Revenues 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Encumbrances 50,000
Total 19,150,000 19,150,000
Financial statements for a General Fund
The results of operation (i.e., net income or net loss) are not relevant for a General Fund. Instead, two
financial statements- a Statement of Revenues, Expenditures and Change in Fund Balance and a Balance
Sheet are appropriate.
Assuming that the total revenue for the town of X is composed of the following sources,
General Property Tax 7,060,000
Licenses and Permits 450,000
Charges for Services 470,000
Fines and Forfeits 310,000
Miscellaneous Revenue 190,000
Total 8,480,000
Also assume that the total expenditures are composed of the following items.
General Government 4,590,000
Public safety 2,000,000
Health and Welfare 1,200,000
Culture and Recreation 210,000
Total 8,000,000
Town of X General fund
Statement of Revenues, Expenditures and Change in Fund Balance
For the Year ended June 30, 19x6
Items Budget Actual Variance Favora
ble/
Unfav
orable
Revenues:
General Property Tax 7,000,000 7,060,000 60,000
Licenses and Permits 400,000 450,000 50,000
Charges For Services 500,000 470,000 (30,000)
Fines and Forfeits 300,000 310,000 10,000
Miscellaneous Revenue 200,000 190,000 (10,000)
Total Revenues 8,400,000 8,480,000 80,000
Expenditures:
General Government 4,700,000 4,590,000 (110,000)
Public Safety 1,900,000 2,000,000 100,000
Health and Welfare 1,100,000 1,200,000 100,000
Culture and Recreation 400,000 210,000 (190,000)
Total Expenditures 8,100,000 8,000,000 100,0000
Excess of Revenue and OFS-
Over Expenditures and OFU
Operating Transfers In 100,000 100,000 -
Operating Transfers Out (100,000) (110,000) (10,000)
 Excess of Revenue and OFS- 300,000 470,000 170,000
Over Expenditures and OFU
Add:
Add: Fund Balance Jun 30, 19x5 1,200,000 1,200,000 -
Fund balance June 30,19x6 1,500,000 1,670,000 170,000

Closing Entries for the town of X General Fund

After the financial statements have been prepared for the town of X General fund, the budgetary and
actual revenues, expenditures and encumbrance ledger accounts must be closed to clear them for the next
fiscal year activities.
Unreserved and Undesignated Fund Balance 50,000
Encumbrances 50,000
(To close encumbrance ledger account)
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
(To close budgetary ledger Accounts)
Revenue 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
(To close Revenues, Expenditures, Other Financing Sources and Uses Ledger Accounts)
Explanation- The forgoing journal entries do not close the Fund Balance Reserved for Encumbrance
Ledger account. Thus, the reverse represents a restriction on the fund balance on June 30 year 6 because
the town of X General fund is committed in the fiscal year 7 to make estimated expenditures of 50,000
attributable to budgetary appropriations carried over from the fiscal year 6. If the fund balance reserved
for encumbrance account had been closed, the unreserved and undesignated fund balance account would
have been overstated by 50,000. The unreserved and Undesignated Fund Balance Ledger account balance
must represent the amount of the General fund’s Assets that is available for appropriation for a deficit
budget in fiscal year 7. When expenditures applicable to 50,000 outstanding encumbrances on June 30
year 6 gets voucher for payment in the succeeding fiscal year, the fund balance reserved for encumbrance
ledger account is debited for 50,000, the vouchers payable is credited for the amount to be paid, and the
balancing debit or credit is entered in the unreserved and undesignated fund balance account.
The budgetary accounts are closed at the end of the fiscal year because they are no longer required for
control over revenues, expenditures, and other financing sources and uses. The amounts in the journal
entry that closed the budgetary accounts were taken from the original journal entry to record the budget at
the beginning.

Town of X General Fund

Balance Sheet,
June 30, Year 6
Assets
Cash 1,420,000
Taxes Receivable- Delinquent 570,000
Less:
Less: Allowance for Uncollectable Delinquent Taxes 10,000 560,000
Inventory of Supplies 500,000
Total Assets 2,480,000
Liabilities and Fund Balance
 Liabilities
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000 810,000
Fund Balance
Reserved for Encumbrance 50,000 Refer
Reserved for Inventory of Supplies 500,000 the table
Designated for Replacement of Equipment 250,000 below
Unreserved and Undesignated 870,000 1,670,000
Total Liabilities and Fund Balance 2,480,000

After June 30, year 6, closing entry for the town of X general Fund are posted, the unreserved and
undesignated Fund Balance Ledger Account appears as shown below.
Unreserved and Undesignated Fund Balance
Date Explanation Dr. Cr. Balance
Y-5 Jun 30 Balance 800,000
Y-6 Jun 30 Increase in the amount reserved for
Inventory of supplies 100,000 700,000
30 Designation for replacement of
equipment 250,000 450,000
30 Close encumbrances ledger account 50,000 400,000
30 Close Excess of Revenue and OFS
over Expenditures & OFU 470,000 870,000

Accounting for Special Revenue Funds

The distinguishing feature of a special revenue fund is that its revenues are obtained primarily from tax
and non-tax sources not directly related to services rendered or facilities provided for use. Separate
special revenue funds are established by governmental units as mandated by legislative enactments, to
account for the receipts and expenditures associated with specialized revenue sources that are earmarked
by law or regulation to finance specified governmental operations. Ledger account titles, budgetary
processes and financial statements for a special revenue funds are similar to those of General funds.
Illustration
To illustrate the accounting for a Special Revenue Fund, Assume that on July 1, year 6, The town council
of the town of X authorized the establishment of a special Revenue Fund- its first such fund- to account
for special assessment against certain residents of the neighboring village of Y . Because the property tax
revenue of the town of X, which among other services financed street cleaning and street light
maintenance for residents of the town only, could not be used for such services elsewhere, the town
council authorized special assessment to finance comparable services for the requesting residents of the
village of Y. The town council adopted a budget for the special revenue fund for the year ending June 30
year 7, providing for estimated revenues (from the special assessments) of ETB 800,000 and
appropriations for reimbursement to the General fund for expenditures made by that fund for the services
provided to the village of Y residents) of ETB 750,000.

Following are additional transactions or events of the town of X special revenue fund for the year ending
June 30 year 7.
1) On July 1, year 6, the town recorded the adopted budget in the books.
Estimated Revenues 800,000
Appropriations 750,000
 Budgetary Fund Balance 50,000
(To record the annual adopted budget for fiscal year ending June 30 year 7).
2) Special assessments tax totaling 820,000 were levied which are to be paid in full in 60 days.
Special Assessment Tax Receivable- current 820,000
Revenues 820,000
(To record special assessments billed, all of which are estimated to be collectable)
3) Cash Receipts from Special Assessment Taxes of 820,000 were collected in full.
Cash 820,000
Special Assessment Tax Receivable- current 820,000
(To record collection of special assessment tax in full during the year)
4) Of the cash receipts, ETB 630,000 was invested in Treasury bills with face amount of 650,000. The
treasury bills mature on June 30 year 7 and were redeemed in full on that date.
Short Term Investments 630,000
Cash 630,000
(To record acquisition of 650,000 face amounts of treasury bills)
Cash 650,000
Short Term investments 630,000
Revenues 20,000
(To record receipts of cash for matured treasury bills. Maturity June 30, year 7)
5) Billings from the town of X General fund, requesting reimbursement of expenditures of that fund,
totaled 760,000; of that amount, 620,000 was paid to the General Fund by Jun 30, y-7.
Expenditures 760,000
Payable to General Fund 760,000
(To record billings from general fund for reimbursement of expenditures for street cleaning and
street light maintenance for residents of the village of Y)
Payable to General Fund 620,000
Cash 620,000
(To records payments of general fund during the year)
6) On June 30, year 7, the town council of the town of X designated the fund balance of the Special
revenue fund (80,000) for reimbursement of the General Fund during the year ending June 30, year 8.
Unreserved and Undesignated fund balance 80,000
FB Designated for - Reimbursement of GF 80,000
(To designate the entire fund balance for reimbursement of General Fund during the year ending
June 30 year 8)
Because of the 760,000 billings of the town of X General Fund to the Special Revenue Fund were for
reimbursement of General fund expenditures, the general fund credited its expenditures ledger account in
the journal entry in which it debited receivable from Special Revenue fund. Trial Balance
Financial Statements for a special revenue funds
The financial statements for a special Revenue funds is the same as that of a General fund-a statement of
Revenues, Expenditures and change in Fund Balance and a Balance sheet. Following are the financial
statements for the town of X Special Revenue fund for the year ended June 30, year 7:
Town of X - Special Revenue Fund
Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 7
Items Budget Actual Variance Favorable/
Unfavorabl
e
Revenues:
Special Assessments Tax 800,000 820,000 20,000
Other - 20,000 20,000
Total Revenues 800,000 840,000 40,000
Expenditures:
Reimbursement of General Fund- 750,000 760,000 (10,000)
Expenditures
Excess of Revenue and OFS - 50,000 80,000 30,000
Over Expenditures and OFU
Add- Fund Balance June 30, Y-6 - - -
Fund balance End of the Year 50,000 80,000 30,000

Closing Entries
Appropriations 750,000
Budgetary Fund Balance 50,000
Estimated Revenues 800,000
(To close budgetary ledger accounts)
Revenue 840,000
Expenditures 760,000
Unreserved and Undesignated FB 80,000
(To close revenue and expenditures ledger account)

Town of X Special Revenue fund

Balance Sheet
June 30, year 7
Assets
Cash 220,000
Liabilities and Fund Balance
Liabilities
Payable to GF 140,000
Fund Balance1
Fund Balance Designated for Reimbursement of GF 80,000
Total Liabilities and Fund Balance 220,000

5.5 CLASSIFICATION AND TERMINOLOGY FOR GOVERNMENTAL FUND

BUDGETS AND ACCOUNTS
I. Classification of Appropriations and Expenditures
The term, appropriations and expenditure, both have to do with resources, which are used by a
governmental entity. The relation between the two is that an appropriation is the authorization to
make expenditure. In reality, an appropriation is actually both an authorization to spend and at the
same time a limitation on spending. An appropriation, when enacted by law is an authorization to
incur on behalf of the governmental unit liabilities for, goods, services and facilities to be used for
purposes specified in the appropriation ordinance, or statute, in amounts not in excess of those
specified for each purpose. The budgeted appropriations are often called estimated expenditures,
expenditures, and
the appropriation budget is called expenditure budget.
budget.
According to GASB’s Principles, Expenditures should be classified by: -
1. Fund
2. Function or program
3. Organization unit
4. Activity
5. Character
1
Unreserved & Undesignated has no balance refer closing entries.
 6. Object
1. Classification by Fund
The primary classification of governmental expenditure is by fund, since funds are the basics fiscal &
accounting entity of governmental unit.
E.g. GF, SRF, CPF, DSF
2. Classification by Function or Program
Functions are group related activities that are aimed at accomplishing a major service or regulatory
responsibility. Programs are group activities, operation on organizational units that are directed to the
attainment of specified purposes or objectives generally speaking, function refers to what is done
program refers to the means by which it is done.
done.
E.g. The GF may have the following program or functions.
General Governmental
Public safety
Health & welfare
Culture & recreation
3. Classification by organization unit
To carry out the broad functions or programs, responsibility is divided to smaller units or departments.
This helps with affixing specific accountability. E.g.
Police dept Public works dept
Fire dept Parks & recreation dept
The key distinction between the classification of expenditures by organizational unit & Classification by
programs or functions is that responsibility for a dept is fixed; where as a number of depts. may be
involved in the performance of a program or a function.
4. Classification by activity
An activity is a specific & distinguishable line of work performed by an organizational unit to fulfill the
overall goals of the program or function. For example, within the police dept, activities such as the
following may be performed.
Crime control by - Foot patrol
- Car Patrol
Traffic control by- Traffic
5. Classification by character
This classification has to do with the expenditure itself than the department or fund in which it is
incurred. The character of expenditure is either.
Current expenditure – Meant to benefit the current period only.
Capital expenditure – Benefits the current period plus other periods in the future.
Debt service expenditure – Includes payment of interest or debt & payment of debt principal that
arises from past period benefits which may also be expected to benefit the current and future
period.
6. Classification by object
Object of expenditure is the thing for which the expenditure was made. It is mainly a concern of current
period expenditures. E.g.
Personal service
Other services & charges
Supplies
Capital outlays
Example: Addis Ababa city council GF
Public safety-------------------Program /function
Police dept---------------------Organization unit
Crime control------------------Activity
Current expenditures---------Character
 Supplies-------------------------Object
II. Classification of Estimated Revenues & Revenues
Revenues are defined, as all increases in fund net Assets except those arising from inter fund transfers
and from proceeds of long-term debt. A governmental unit and the funds thereof may raise revenue only
from sources available to them by law.

The primary classification of governmental revenues is by fund. Within each fund, the major
classification is, by source. Major revenue source classes are: -
1. Taxes 4. Charges for services
2. Licenses & permits 5. Fines & forfeits
3. Inter governmental revenues 6. Miscellaneous revenues
1. Taxes
Taxes are a forced contribution imposed on the citizens by the government. There are a number of
different kinds of taxes possible, including property (land use), sales, excise, income, customs, and
capital gain etc…. Giving a formal notice of a tax to be paid is called a levy. A tax levy, especially on
goods or property also typically creates a Lien, which gives the taxing authority, the power to confiscate
the goods or property in the event of a non- payment of the tax. Incorrect calculation of taxes by the tax
payer may result in penalties. Taxes, which are not paid on time usually, include accrued interest on any
unpaid balance. These penalties & interest create an additional revenue source for the government.

In addition to revenue accounts, the following accounts may also be needed to account for tax
collections; Taxes Receivables Current, Taxes Receivable Delinquent, Tax Lien Receivable, Interest &
Penalties Receivable on Delinquent Taxes (all four are assets), Deferred Taxes, Trust for property owners
(Both are Liabilities), Allowance for Uncollectable Taxes (contra-Asset). Any uncollected taxes are
accounted for as a reduction of revenue.

The deferred taxes account is credited for taxes, which are paid in a year before they may legally be used
for expenditure. The Taxes Receivable Current account is used to accrue taxes, which are due in the
current year. The taxes receivable Delinquent account is used to accrue taxes, which are due in the current
year. The Taxes Receivable Delinquent account is used to record any taxes, which are, past due. The
Taxes Lien- Receivable account is used to record taking possession of goods on which an owed tax has
not been paid. If those possessed goods are sold in an attempt to cover the tax & any additional cost
incurred in colleting it, The Trust for Property Owners account is used to record any balance remaining
from the selling price after the tax & collection cost are deducted. The Interest & Penalties Receivable on
delinquent taxes account is used, obviously, to record interest & penalties due on unpaid taxes.
2. Licenses and permits
Licenses and permits may be divided into two categories.
A) Business - like merchants licenses, customs clearing agency licenses, professional
(physician, attorney)
B) Non business - like driving licenses, hunting license, Residential permits.
Revenue from licenses & permits are accounted on the cash basis.
3. Intergovernmental Revenue
Intergovernmental revenues include Grants, Entitlements & Shared Revenues.
a) Grant is money, which is given for a specific purpose & it should be classified according to both
its source & it purpose. A grant could be given from the federal governmental to regional state
government (called a subsidy) or from a foreign government to the federal government. Grants can be
divided into two types.
1. Shared revenues: is revenue levied by one government but shared on a predetermined basis, often
in proportion of the amount collected at the local level, with another government or class of
government. It should be accrued unless there are matching or specific spending requirements.
 2. Entitlement: is the amount of payment to which a state or local government is entitled as
determined by the federal government pursuant to an allocation formula
4. Charges for services
Charges for services include revenue from charges for all activities of a governmental unit, except the
operations of enterprise funds.
E.g. court costs, special parking meters. It should be recognized as revenue when earned, if that is prior
to the collection of cash.
5. Fines & forfeits
Fines & forfeits are penalties, which are paid to governmental unit, usually as punishment for violating
the law. It is accounted thorough cash basis.
6. Miscellaneous revenue
E.g.
Interest income on investments – should be accrued
Sales of fixed assets
Insurance claim
Contribution from private individuals
5.6 INTER FUND TRANSACTIONS AND TRANSFERS
Inter fund transactions are transactions between different entities within the governmental unit. They
need to be recorded in two different sets of books.
1) Inter fund loans & advances
Often funds loan or advance money to each other in order to use idle cash effectively. Short Period (one
year or less is commonly used), the borrowing is called a loan; loan; for longer periods, the borrowing is
called an advance.
advance.
Due from SRF xxx
Cash xxx
Cash xxx
Due to the GF xxx
2) Quasi –external transaction
These are transactions that would be treated as Revenue, Expenditures or Expenses if they involved
organizations external to the governmental unit. They are the type of inter fund transactions which are
considered as revenue & expenditure within the entity. The most meaningful form of reporting for such
transactions is to report expenditure in the fund receiving the services & report revenues in the fund
providing the services, b/c the fund receiving the services would have had to change expenditures if it
had obtained the services for an organization external to the governmental unit.
GF
Expenditure xxx
Due to ISF xxx
SRF
Due from GF xxx
Revenues xxx
3) Reimbursements
Are transactions that reimburse a fund for expenditures made by it on behalf of another fund i.e. one
fund pays a bill on behalf of another & is then reimbursed.
Expenditure xxx
Cash xxx
(To record payment of bill on behalf of ---)
Cash xxx
Expenditure xxx
(To record reimbursement)
4) Residual Equity transfers
Residual Equity transfers are non-recurring or non-routine transfers of equity between funds made in
connection with the formation, expansion, and contract or discontinues of a fund. not only are they not
Revenues or Expenditures, they are not Other Financing Sources or Uses, even though they are
technically increase / decreases in fund financial resources.
Equity transfer out xxx
Due to ISF xxx
Due from GF xxx
Equity transfer in xxx
5) Operating transfers
Operating transfers are made in connection with the normal operation of the recipient fund. They are
legally authorized transfers from a fund, which receives revenue to the fund through which the resources
are to be expended. These transfers are other financing source of the receiving fund, other financing uses
of the paying fund.
Other Financing Uses-Operating Transfers Out xxx
Due to DSF xxx
Due from GF xxx
Other Financing Sources-Operating Transfers In xxx
 4 & 5 are properly called transfers & 1, 2, 3 are merely transfers.
transfers.